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Tuesday, October 27, 2015

D&O: Revisited

#1 Board/Director Rule: Never
serve on a Board of Directors for a community that does not have proper
Directors & Officers (D&O) insurance coverage in place. Without such coverage, money may not be
available to defend you in the event that you are personally sued by an angry
homeowner - leaving you potentially exposed to covering such costs out of your own pocket! Of the different types of
insurance communities need to carry, D&O is the least standardized. For
instance, did you know there are three areas of coverage?

Side A coverage
protects Directors from claims of wrongful acts when the Association refuses or
is unable to provide indemnification

Side B is for claims
by the Association for money paid to indemnify a Board member

Side C is for claims
by the Association against the Association itself.

Confusing? In addition, constant court challenges continue to
add new wrinkles to how D&O is processed.
See how technicalities impacted three recent court decisions:

Internal
lawsuit coverage

Normally, insurance cannot be used
when parties within the same corporation are suing each other (ex: the Association
suing an individual Board member, or Board members suing each other). However, in Georgia this assumption has been weakened. At the trial level, the D&O insurance
carrier (St. Paul Mercury) obtained a judgment against the FDIC and former bank
officers, barring coverage under the usual insured v. insured exclusion. However, the Georgia appeals court
reversed the ruling, saying that such exclusions are ambiguous under state statutes, and
outside evidence might be necessary to determine intent.

Timing
of Contract

In a Rhode Island case (Transched
Systems v. Federal Ins.), the insured client negotiated to sell its software
products. Following delivery, the purchaser realized that the seller had
breached the asset purchase agreement, and that the senior officers
misrepresented the software. Since the
seller was no longer in business, the purchaser attempted to collect a judgment
from the seller’s D&O insurance company, but was denied based on the breach
of contract and other exclusions. The court reversed this, saying that
contract exclusion did not apply since the misrepresentations took place
before the contract was formed.

Substandard Coverage

Over in
Kentucky, (State Auto v Highland Terrace Counsel of Co-owners), Highland
Terrace was sued by an owner trying to block a $700,000 special assessment. The Association's D&O claim was denied by
the carrier. The court upheld the
denial, since the underlying suit did not allege claims against the individual members of
Highland Terrace for which the insurance could have had an indemnity
obligation. The State Auto D&O form did not provide entity coverage to Highland Terrace.

The above situations illustrate
why it is critical that you use a professional insurance broker who regularly
operates in the HOA industry – preferably someone who is active with the local
Community Associations Institute (CAI) chapter.

While there will always be kinks
in obtaining the best coverage possible, here are some ‘best practices’ you can
implement to reduce risk exposure, according to insurance attorneys:

Create term
limits

Locate and
train Board volunteers with diverse sets of skills and backgrounds

Evaluate the
quality and effectiveness of Board meetings, including the use of agendas,
the preparation and distribution of materials, and the timing and length
of meetings

Keep apprised
of governance trends and legislation

Develop and
adhere to a code of ethics

Develop and
implement committees to oversee and monitor areas of potential liability,
such as director nomination,
financial audits, and regulatory compliance

Prohibit
related-party transactions or require independent review of such
transactions